Class I Milk

Class I Milk

David Sparks Ph.D.
David Sparks Ph.D.
Since the 2018 farm bill, the price for Class I milk, i.e., milk used to produce beverage milk products, has been calculated using the simple average of advanced Class III (cheese) and Class IV (milk powders) skim milk prices plus 74 cents. In years prior, the formula was the higher of advanced Class III and Class IV skim milk prices. The change was made at the request of dairy industry stakeholders and was intended to improve risk management opportunities for beverage milk. COVID-19-induced volatility combined with the 2018 farm bill formula change resulted in hundreds of millions of dollars in Class I pool revenue losses, renewing industry discussions on optimal Class I pricing methods. Dairy farmers are curious about how the multiple circulating proposals of Class I formula options differ and how they would each impact Class I revenues. Today’s Market Intel analyzes three alternatives to the current Class I pricing calculation and their associated revenue impacts for dairy farmers supplying the Class I marketplace.

Policy background on the initial 2018 change and an analysis of early 2020 revenue impacts of the change was discussed previously here: Impact of the Farm Bill Change to the Class I Milk Price on Dairy Farm Income. Other analyses on the financial impacts of milk and dairy commodity price volatility on producer price differentials, de-pooling and the ineffectiveness of dairy risk management tools to offset negative PPDs can be viewed in the following: De-Pooling and Record-Large Negative PPDs Continue Into July, Negative PPDs to Offset Milk Price Rally, Revisiting Record-Large Negative PPDs on Milk Checks and Lack of DMC Payments Does Not Reflect Dairy Farmers’ Difficulties.

Understanding the structure of the current Class I pricing formula is essential to compare alternatives. Figure I displays a diagram of the current calculation which, again, is the simple average of advanced Class III (cheese) and Class IV (milk powders) skim milk prices plus 74 cents. Any large disparity between the Class III skim milk price (SMP) and Class IV SMP is smoothed through the averaging feature, meaning the final Class I base calculation will not fully reflect the higher (or lower) option. The 74 cents was originally calculated using the historical difference between the Class III and IV skim prices to make dairy farmers and milk prices indifferent to the change over the long term. The Class I location-based differential is included in our diagrams to reflect a final adjustment made for regional supply and demand differences, which currently range from $1.60 per hundredweight to $6.00 per hundredweight.

Previous ReportThe Jensens of Eden
Next ReportConsolidation in Idaho_s Dairy